This article is going to be a contradiction. After the fall that housing has suffered, I think that that, as an asset class, housing will probably be a decent investment going forward. But nobody should ever consider owning a home.
One of the biggest scams perpetrated on the American public is that owning a home is the "American Dream." It's more nightmare than dream as millions of Americans now know. But it has always been that way. Here's why.
1) No diversification. Most people put the bulk of their net worth in their house and then they borrow money to pay for the rest of it.
2) It's illiquid. When times are tough and you need cash, you can't sell it.
3) It costs a lot more than renting. Most people think you are "throwing money away" when renting. Quite the reverse. There are many hidden costs when buying a house:
4) It's not fun. I'd much rather have my landlord shovel the snow than me shovel the snow. And, by the way, heart failure goes way up during a snow storm. A sedentary lifestyle doesn't lend itself to the arduous task of shoveling our driveways.
- Transaction costs (legal, real estate agent, title check, inspections, etc.) often come to 7% to 10% of the cost of a house. So you are 7% to 10% down immediately.
- Home improvement (adding a bathroom, upgrading the kitchen, installing double-pane windows, landscaping, etc.)
- Ongoing maintenance and repairs (periodic roofing, plumbing repairs, yard upkeep, fixing things, etc.)
- Your real estate taxes (which will ultimately be more than the tax savings you get on your mortgage interest)
5) Your down payment is not a down payment. It's the sound of a flushing toilet. Think about it: You never get that money back. Even when you sell the house, you just put it into the next down payment for tax reasons. You can say goodbye to that money once you put it into a house.
6) No job flexibility. Why did owning a house become "the American dream"? Not to sound socialist (since I'm the opposite), but Corporate America was happy to propagate that myth so it would be harder for you, the homeowner, to leave your job if there were few jobs in your area. You'd have to both move and quit your job if you wanted to leave your job. Moving is harder when you own.
7) I think in the long run, housing prices go up. But if you really believe in housing as an investment, then own a good REIT or two and diversify by buying REITS that own residential homes throughout the country so you aren't tied to any one area. If you really want to borrow 300% and put 50% of your net worth plus debt into one investment, then that's what you should do. But I wouldn't really recommend that either.
By Dogface Posted 3.22PM 8/20/10
I agree with all 7 of these and could even give you quite a few more...
My biggest problem with this list, is that it was written from an investment standpoint. If you're a property investor that's fine. But most are not. One of the reasons we're in the housing mess that we are in, is there were too many amatuers trying to "flip" a quick buck. We stopped buying homes and started buying houses. We saw all of these boxes as ways to make money instead of places we wanted to live, and live for a long time. People need to reset their mindset(s). A home is where you live, raise children, make memories, hang pictures, have parties, it should be your sactuary and comfort, not your bank! Back in the 40's, 50's, 60's, and even the 70's - - the public bought homes, not investments! People were also far less gypsical. They stayed in one place. And there is nothing wrong with travelling/moving but it is expensive. Especially when you are focussed on having bigger/better. And there is nothing wrong with bigger/better; as long as you can afford it!!!!! The Optimism Era (1945-1972), was a more centered time of contentment. There were two ways (legally) to earn money; brains or brawn. You worked. You saved. You bought what was needed. People didn't have home-offices because their neighbors had them, because it added to the square-footage. They had offices/studies/dens because they read. They wanted a quiet place away from the kids, which wasn't all that quiet because they were only encased by 1500SF if they were lucky! They lived within their means. They were too tired to feel entitled. Two-story homes weren't pretentious - they were prestigous. And usually for those who had MAIDS! The common man was too ass-whipped to climb stairs at night!
I've long said that renting is the New American Dream. It's easier! It's cheaper! Rent or own; you still have to pay. And the whole "you're renting?" stigma is done. You do what and live what you can AFFORD! Me, I own. I'm old-school. I love landscaping and doing stuff to my home. I also hate people telling me what to do. A landlord is one less restriction in my life. I also plan on staying in my home for a long time. And if I only live 14 more years, my son will have a 15 year mortgage. Not bad for a 22 year old. In 10 years I may have enough equity for his college tuition. The key word - is MAY! If I do survive my mortgage, the market will be better, and it will be, unless people start having sex with their phones instead of other people. I can have a payment free place to live (minus prop tax). Or, I can sell and rent and add to my retirement. With all of that said: I truly believe renters are throwing their money away, but only if they can afford to buy. Owning a home is a huge responsibilty. It can also be a truly rewarding. Now is a great time to buy, if you can afford it! Especially if you're buying a home, not a house!
This bigger/better/faster/ mentallity has to stop, unless you are done being lazier. Credit isn't cash. Expensive clothing isn't culture. A nice car isn't status - it's stupidity. Unless it's paid for or easily payable. Put the iPhone down and forget about the apps and focus on applications, as in job applications. Stop wasting your hard-earned money on iced coffee and energy drinks. Stay home and have a cup of Sanka or Tang in YOUR HOME!